Good afternoon, ladies and gentlemen, welcome to the conference call regarding the third quarter 2020. At this time, all participants have been placed on a listen-only mode. The floor will be open for questions following the presentation. Let me now turn the floor over to your host, Guido Pickert. Please go ahead.
Thank you, operator. Let me start by welcoming you all to AIXTRON's presentation of our Q3 and nine-month 2020 results. I'd like to welcome the members of our executive board, Dr. Felix Grawert, Dr. Bernd Schulte, and Dr. Jochen Linck, who joined us early this month, as well as our VP of Finance and Administration, Charles Russell. As the operator indicated, this call is being recorded by AIXTRON and is considered copyright material. As such, it cannot be recorded or rebroadcasted without permission. Your participation in this call implies your consent to this recording. Please take note of our safe harbor statement, which can be found on page two of our results presentation slide deck, as it applies throughout the conference call. You may also wish to take a look at our latest IR master presentation slide deck with additional information on AIXTRON's markets and technologies.
Both are available on our website. This call is not being immediately presented via webcast or any other medium. However, we will place an audio file of the recording or transcript on our website at some point after the call. I would now like to hand you over to Bernd Schulte for opening remarks. Bernd?
Many thanks, Guido. Let me all welcome you to our results presentation of the first nine months of 2020. I will start, as usual, with an overview of the key developments in the third quarter on slide three before handing over to Charles and Felix. Before that, I would like to introduce to you our new colleague in the executive board, Dr. Jochen Linck. We are happy to welcome Jochen as our new Chief Operating Officer. Jochen is a mechanical engineer with a PhD in lean production. Over the last 20 years, he worked in various high-tech industries such as aerospace, automotive, and IT, in product development and operations. Jochen's passion and track record for R&D and operational efficiency will greatly help AIXTRON to further enhance our operational excellence and prepare for the future business expectations and growth. We are very glad to have him on board.
Now to our results. With orders slightly above EUR 70 million, we had a continued solid quarter for order intake, driven mainly by demand for power electronics and laser applications. We finished the quarter with an order backlog of EUR 164 million, which is 51% over the same period last year. As expected, revenues in Q3 came in at EUR 64 million, which was higher than the previous quarter and higher than the same quarter of the previous year. We achieved a 40% gross margin and a 13% EBIT margin in Q3. Overall, our results were very much in line with what we expected. Revenues and results in Q4 of this year are expected to grow strongly over Q3. We confirm our full-year guidance, which we firmed up and which Felix will explain to you later in some more detail.
Before handing over to Charles, let me say a few words to you on the situation in light of the coronavirus pandemic. Unfortunately, the number of COVID-19 cases are dramatically rising in several regions of the world. We have increased our internal safety measures again to mitigate the risk of infection within our premises. Nevertheless, we have not recorded any significant effects related to COVID-19 on our operations and business. However, we will continue to watch the developments of the global pandemic very carefully and remain to be ready to take measures if necessary. At this point, let me now hand over to Charles for a more detailed overview on the Q3 2020 numbers. Charles?
Thanks, Bernd, and hello to everyone. Starting on slide four, our income statement. As expected, total revenues for the quarter at EUR 64 million were higher than the EUR 56 million of the previous quarter, reflecting the shipment schedules of our customers. Gross margin was 40% in Q3, compared with 41% in Q2, mainly because of a less favorable dollar exchange rate. Had the exchange rate been the same as in Q2, the gross margin would have been 42%. Just under 50% of sales were denominated in U.S. dollars in the quarter. This is lower than the 70% of sales that we saw in the past because customers in China are less willing to use dollars. Operating expenses in the quarter at EUR 18 million were lower than the EUR 20 million in Q2 2020.
Selling expenses were EUR 0.9 million less than in Q2, mainly because of lower external sales commissions.
R&D project costs were lower by EUR 1.6 million in Q3 than in Q2. These changes mainly related to projects which were completed or nearing completion. Other income was also EUR 0.7 million less in Q3 than Q2. EBIT in Q3 was EUR 8 million compared with EUR 3 million in Q2. The tax rate is very low cumulatively because the gain on reversal of impairment in the first quarter is not a taxable transaction. Net profit in the quarter was EUR 7 million. Turning to the balance sheet on the next slide, inventories of EUR 101 million are again higher than previous quarters in preparation for the scheduled high level of shipments in the fourth quarter of this year. With fourth quarter sales expected to be in the range of EUR 100 million-EUR 120 million, we expect inventories to fall substantially by the year-end.
Receivables of EUR 19 million represent 24-day sales outstanding compared with 30-day sales outstanding at the end of Q2. Cash and investments were EUR 293 million at the end of the quarter, similar to the EUR 289 million at the end of Q2. The slide shows EUR 263 million in short-term assets and also EUR 30 million of cash on deposit within non-current assets. Customer deposits of EUR 63 million at the end of Q3 represent 38% of the order backlog. Moving to slide six, our cash flow statement.
Free cash flow, excluding the movements in and out of various investments, was EUR 5 million in the quarter. Because a lot of the receivables we would have expected to receive in the early part of the year were collected in Q4 2019, and because of the inventory build-up ahead of the Q4 shipments, cumulatively, free cash flow was minus EUR 3 million for the nine-month period.
With that, let me hand you over to Felix.
Thank you, Charles, and welcome to you all. I will give you a short overview of the development within our portfolio and of our outlook. In power electronics, we see solid demand for tools to produce gallium nitride power devices. Adoption of these devices is growing in more and more applications, starting from mobile phone and laptop charger. We also see applications in server and telecom power supplies, as well as in automotive onboard charger. Our customer base is growing as more and more players are entering the gallium nitride power market. For example, we are now serving all of the tier one foundries with our gallium nitride product. In addition, and despite the high market share AIXTRON has in gallium nitride, we continue to convert customers from other vendors to our platform.
In this quarter, we have been able to win Siltronic, one of the top five wafer makers, as a customer. In silicon carbide, we see continuous demand from our existing customer, and we are making good progress with our qualification program at our other customer. We have achieved the first full cost customer acceptance and with this an additional customer in volume production on our silicon carbide tool. Overall, power electronics made up about 50% of our order intake in the third quarter of this year. In our MOCVD business, we also recorded continued good demand for our laser solution, driven to a large degree by the need for optical data communication. For example, the laser specialist, Modulight from Finland, has decided to scale up production of epi wafers with our G4 tool this quarter. The area of lasers was about 35% of our order intake in Q3.
We continue to see a healthy pipeline for our LED equipment, in particular for the production of LEDs for fine pitch or mini LED displays and mini LED backlighting units. With this, let me come to our OLED business at APEVA. We are going through the qualification process with our Korean customer and are about to complete the qualification of the Gen 2 deposition system. With this, we will successfully complete and close the Gen 2 project. Once this milestone is achieved, we will continue the discussions with our customer on how and when to enter the final stage of qualification, namely the proof of scalability of our technology to larger formats in typical production size. Let me finally give you some detailed information on our firmed up guidance for the year 2020, as illustrated on slide seven.
We now expect revenues to be in the range between EUR 260 million and EUR 280 million, which falls well within the range of the original guidance. We expect orders to be in a tightened range between EUR 270 million and EUR 290 million. We continue to expect a gross margin of approximately 40% and an EBIT margin between 10% and 15% of revenues for the full year 2020. We have not amended our EBIT guidance as some upcoming external events, such as U.S. elections and Brexit, might lead to significant currency fluctuations with a respective influence on margins. Nevertheless, we believe that the midpoint of the EBIT range can be seen as our base case.
Our expectations are based on our solid order book at the end of this quarter and, again, a healthy level of customer inquiries for our products serving different industries. Our forecasted U.S. dollar denominated orders and revenues for the remainder of the year are, as always, based on an exchange rate U.S. dollar per EUR 1.20. Overall, we confirm our guidance and can provide a positive outlook on the remainder of the year. In particular, the share price drop of today does not reflect our own confident view of the business. With that, I will pass back to Guido before we take questions.
Thank you, Felix, Bernd, and Charles. Just one little comment. The order intake range is between EUR 270 million and EUR 300 million. We will now take questions, operator.
Okay. Ladies and gentlemen, if you would like to ask a question, please press nine and the star key on your telephone keypad. In case you wish to cancel your question, press nine and the star key again. Please press nine and the star key now to state your question. The first question comes from Uwe Schupp from Deutsche Bank. Please go ahead.
Yes. Good afternoon, gentlemen. It's Uwe Schupp from Deutsche Bank. Just two questions from me. On the competition, and secondly then also on the Q4 guidance. Your competitor had a press release out earlier this week, and they seem to have made some inroads with their new MOCVD system with OSRAM Opto Semiconductors, which I think all realize that it hasn't been your core customer base, if you will because you traditionally focused more on the volume markets certainly in Taiwan and also in China. How disappointed are you that you yourself didn't get such an order? Can you just kind of frame that very press release for us? Secondly, your guidance obviously implies a relatively hefty EUR 100 million in revenue, and I think that is maybe one of the reasons the market takes a bit of more cautious view.
Maybe some of the participants haven't realized that you actually did more than 200 in revenues, only a few years ago in a given quarter. If you look out of the window, how busy is the parking lot and the lorries shipping systems to your customers? In other words, this EUR 100 million, have you seen a fair amount of shipments already in October, or would it really be December loaded as far as you can tell? Thank you very much.
Yeah, thank you, Mr. Schupp, for your question. I will respond to the first part of your question, Felix then will take over for the guidance part of the questions. You know well that the press release was certainly not a surprise, as the tool has been announced already two years ago. According to customer feedback, our existing tool, the G4, remains to be the superior in performance, we think, and what we get as feedback. What is even more important, especially for all kinds of LED applications, it is significantly better in terms of cost of ownership. Also keep in mind that we're working very hard in development of our next generation arsenide phosphide MOCVD tool.
With that tool, we target certainly new features which customers need in the future for higher performance devices, such as full automation, but also an even lower cost of ownership. We are still on track, yeah, that we come out with this tool to the first customers in the course of next year, probably even in the first half of next year. Overall, let me say it was not a surprise to us. I think we looking very confident to collaborate with all kinds of accounts for various applications, and we are very confident we remain the dominant player in the field of arsenide phosphide MOCVD.
With that, let me come to the second part of the question. The question was that the realized revenue in the first nine months of EUR 160 million, a little over that, and our guidance of EUR 260-EUR 280 clearly implies that in Q4, we are planning to ship well over EUR 100 million of revenue. Yes, this is quite evenly split across the quarter, the month of October, November, and December. In particular, I think also very important because we see all kind of lockdowns due to COVID and so on. We have seen that our supply chain has been stable throughout the year, and also in the big heavy lockdown we had at the beginning of the year, so we are not scared at all.
Furthermore, all the parts and the components that are being used to make this revenue have arrived already on our shop floor, are just in the assembly, given also that the systems undergo several months of testing before they are finally shipped. We are confident to make that revenue, and you can be assured that we judge the risks or supply chain risks or whatever somebody might interpret into that as minor.
That's very helpful. Thank you.
The next question comes from Jürgen Wagner from MainFirst Bank. Please go ahead.
Yeah, good afternoon. Thank you. On OLED, you said that you are about to enter the next stage. What business prospects do you see over the medium term, and what are your running costs this year, and then when this phase is concluded, and next year? Thank you.
First of all, we said we first conclude the project. I think this is a very important milestone because that means that the feasibility of the OLED technology by then, when it's concluded, is really demonstrated. It took us longer than we had expected, but I think we are very, very close to that milestone. When all those results, you know how a qualification goes. Yeah? One is testing the product, but then also, of course, the customer, more importantly, is really producing devices, is producing OLEDs on that device and checking what kind of a performance of the OLED is achievable. That is then really the foundation for the decision-making, together with the customer, for example, what sizes of a system do we select? What specification of the system is being selected?
You can imagine there's a couple of technical discussions which then lead over to finally a commercial discussion and a purchase order. Just to give you a little bit of light on what on the content level is happening to enter the next phase. The next phase, the year of 2021, would then very clearly be the scale-up phase. We always have mentioned that and communicated to the markets that it would be a scale-up to a larger size system. However, first of all, it would be a system of one chamber. Yeah. Only when that project is concluded, it would go into a full production system consisting out of multiple chambers, meaning a full volume. There's two phases to come. The year of 2021 would be a scale-up to the larger system.
With this here, we have been working on significantly reducing the running cost, because of course, a lot of the elements of the development simply are finished. We would be clearly looking at a running figure very well below the EUR 20 million per year that we have today, and also very clear what we have mentioned to the markets, in the next phase, also customer, by the gross profit generating from such system sale, needs to carry a significant part of that running cost, rather what we have done now in the very initial phase, AIXTRON, so to say, free in the startup of this technology, financing all of that. Yeah? The EBIT impact on our bottom line will be significantly reduced.
How significant will that then be? Is it 50%, 30% you can pass on?
I'm targeting a high single-digit negative EBIT impact on the bottom line, but no longer a double digit.
Okay, understood. Thank you.
The next question comes from Ms. Olivia Honychurch from Liberum. Please go ahead.
Hi. Thanks for taking my question. Two from me, if that's okay. First of all, on the silicon carbide side, you've given us a bit of color, in terms of qualifications, but I was wondering if you could go into a little bit more detail around that customer qualification. Is that for one of your larger customers? I suppose simultaneously, when do you expect to start shipping to them in commercial volumes? In terms of other customers, are you any closer to moving beyond the qualification stage with those businesses? And if so, when would you expect those qualifications to conclude and lead to potential orders from those customers once you've qualified? That's on the silicon carbide side. Just in terms of your gross margins, I know that you're introducing a handful of new platforms across your portfolio.
What extent of an impact do you expect those introductions to have on growth margins? Do you think there is a potential for those to rise above the current 40% guidance in the coming years? Thank you.
Yeah. Thank you very much on your two questions. Let me get started with silicon carbide first. I think it's very well known to the market that we are in full production with our long-term existing lead customer. With this customer, we are in full production ramp. This is a very major customer for the whole market. According to our own estimates, for the year 2020, we will achieve about 40% market share of all silicon carbide tools that are being shipped, which I think is a reasonable number. This is really mainly due to this one customer who is in full ramp. We have now, what I mentioned earlier, achieved the qualification of our tool with the second customer. The second customer, again, is targeting the market for automotive, which we all know is the biggest market, the volume market, and expected also to ramp very fast.
In effect, we very shortly expect from this second customer, very shortly, a follow-on purchase order, a repeat purchase order, because this customer is already now, as we speak, with our tool in full volume production and has just secured additional orders from their customer, meaning the automotive guys. Yes, there will be a very clear follow-on orders and ramp. I could not comment, simply because I don't know it, how many follow-on tools there will be in 2021 and 2022 for this customer. Again, there's clearly a ramp planned based on our tool. We are also the only vendor in this customer. Not to forget, as we had mentioned in previous calls, we have our tool in other customers where the qualification is ongoing.
We are expecting to complete those qualifications within the next one quarter, two quarters, depends typically also on the technical requirements that the customer is putting on it and their process for qualification. Very clearly, also for these other customers, we expect follow-on orders to come within the year 2021. That I would put on the silicon power. Bernd, you want to take the gross margin?
Yes. On the gross margin, Olivia, certainly when we develop new products, we clearly target to offer higher performance and higher value than the current products to the customers. With that, we certainly also have the clear target that we can take a certain share from that higher value meaning, in other words, that the gross margins are targeted to be higher than the existing products, which went through a long life cycle already, and therefore also to certain natural price erosions. That is very clear that we're targeting for a higher gross margin. Please do me a favor, don't pencil it in for 2021 because I think for 2021 it will not really come into a big effect. The effect should more be seen beyond 2021.
I think this is a very important point. Our tools is real high tech, and it takes really for our customers, because our customers then have a very big responsibility again to their customers. Think how long the value chain is. A qualification does not only mean that our tool needs to be up and running and work at the customer side, but then the customer has to convert all their processes to the tool, so it on a technical level has to be up and running. Then our customers, the semiconductor players, they have to send the chips, which are then produced on our new tool at their premises, to their customer to get their acceptance, to get their qualification acceptances. That again, is reliability testing and so on. All these things take several months to be done simply on the physics, what's being happening.
Only when that is completed, the tool is qualified, then the customer places a follow-on order. The tool needs to be produced, needs to be shipped, needs to be installed, and then you see it in volume ramp. Just to shed a little bit of light, why this is a process which is not completed within six or nine months, but which is rather taking about two years or so. This is simply the technical chain, the very long supply chain, and also the very rigid quality requirements, especially in power electronics that's behind it.
More, if that's okay. Just to follow up from what you were saying earlier about the OLED situation. If next year is going to be the scale-up phase for that bigger system, at what point do you need to get the initial purchase order through from the customer? I'm just thinking about how we should model that. Could we expect it to come in at least by the end of Q1 2021, or do you think it will be beyond that?
Let me clarify, just to avoid that there's a misunderstanding. With scale up, we mean scale up of the technical size of production. To say the pieces which is being put in there. It's not a scale up, which I think your question implies in terms of volume, meaning, a volume ramp in terms of revenues or profitability. We speak here about a technical scale-up, about one tool, you could say a research tool or a pilot line tool. N equals one. With substrate of a larger size, and larger means scaled up. Scale up in a commercial sense of going into a volume production being visible in the financial statements, in terms of large double or triple-digit numbers, that I think you can model in somewhere 2022, 2023.
Okay, great. Thank you.
Thank you. At the moment, there are no further questions, let me hand back over to your host.
Okay, thank you everyone. Let me, before we finish the Q&A, just make a comment on today's share price development. First of all, let me tell you that we are very surprised by this development as we basically have confirmed exactly what we have said, basically, the quarters before. We are very well on track, in terms of our guidance, revenues, orders, profits. We do not understand this strong reaction, in particular with the guidance we have given, with the precision of the guidance in revenues between EUR 260 and EUR 280. The midpoint has just been more or less the expectations of the market around EUR 270. With that, I just want to conclude that there is no change to the plan, and we are very positive and optimistic going forward. We're seeing all the developments we told you in the past and today are happening.
There is no change to the company's strategy or whatsoever. We just want to share with you, probably we have that in common, our surprise.
Thank you, Bernd, for this clarification. Thank you very much to all of you. This concludes today's call. Very happy to do follow-up calls. You know where to find us if you have additional questions. Thank you.